Below you can find few examples how you can use averages in different ways. You simply take longer time frame and observe where the price is. So, in the example below we are looking at moving average. When price is above that average then that is a signal for us that the overall trend is up:. You should also pay attention at what direction moving average is pointing.

Is price crossing through moving average? This is also a valid signal. When price for most of the time was right below average and suddenly is crossing through to the other side than it is a sign that overall sentiment may be changing like in the example below:. That is a very important function. Some averages are commonly used by traders, for example 50, or averages. They are very popular and when price is moving near them then you can expect reaction. If price was most of the time above average, it is possible that there will be support.

Check the example below:. On the other hand, if the price is below averages and is moving closer to them, then it is possible that averages will work as a resistance area. As you already know, knowledge about possible support and resistance areas is very worthy. You can write this into your trading plan and close trades at better moments.

It depends strongly from trader and trading style. For beginners, I suggest to put on chart at least one average from each group. Periods may be different for some traders. The values from above are there to give you some idea about scope of each group. So, you just want to have one average from short-term group, one from medium and one from long term group. You may create set like:. There are many trading strategies based on averages.

Rainbow chart is very popular; you can find it in many trading platforms. If there is no Rainbow chart, then you can build it by yourself. Rainbow is usually constructed from moving averages with period range 2 — It may be something like averages 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15 … and so on. For averages from higher groups distance is wider, that is why in last group we have , , … Or if you need numbers for all rainbow averages, here you go:. You can use type of averages which is best for you.

I use in most cases exponential averages or linear weighted averages. You can see that this is a simple tool. It helps you to check current situation. Obviously, this is a tool for traders who want to trade with trends.

Simple Moving Average

With Rainbow tool, they see current trend. Also, there is an information about support and resistance areas. Like other tools which help with catching trends and it is great with that. As always, problem is with range moves. There is a big risk that you will overtrade when there is no clear trend in place. In situations like this you will notice that Rainbow is narrow and it is changing directions a lot. Like in the example below:. You can see right away that Rainbow is rather flat and price is moving up and down. Thing with range moves is that it is rather hard to spot them in the beginning.

After a while, like in chart above you know that you are dealing with range move. Before that it is not so obvious. It comes with practice. Check higher time frames, use trend lines so you have better understanding of current situation. From my experience with Rainbow tool I can tell that it is best to join them with other indicators. You can mix Rainbow with other trading tools you like most. Overall, in my opinion Rainbow can be very powerful when joined with other tools with good trading strategy.

After long uptrend, there was a strong move down. Was it a change in trend? We can see that longest averages gropup violet is still wide in this place, like other groups. This is not a good place to go short. You can close position here but it looks like trend is up.

Situation like this is not rare and with help of Rainbow you can trade in right direction and you can avoid trading against main trend. You can see that break below support was a start for a strong move down.

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You could enter at the break because earlier trend was also down and it was a correction up or wait for reenter later. This is a good example that Rainbow is trend indicator we know how strong is trend, direction and longer Kijun line is our trailing stoploss line. Thanks to that you can maximize profits from your trades, because you will stay in trade as long as possible. We will first calculate the multiplier. We will now calculate the current EMA. However, we will need a previous EMA value. We apply the values we have in the formula:.

The multiplier we calculated determines the emphasis put on the recent periods.

In this manner, the more the periods there are, the less the emphasis will be, because it will embrace more periods. Now look at the black ellipse and the black arrow on the chart. Notice that the candles in the ellipse are big and bullish, indicating a strong price increase. The difference is that the VWMA puts emphasis on the periods with higher volume. This is how a 5-period VWMA is being calculated:.

So, the higher the volume of a period, the more the emphasis will be on this period. Have a look at the image below. We have two Moving Averages on the chart. In the black ellipse we see a rapid price increase. The Moving Average indictors can help us to identify the beginning and the end of a trend.

The Moving Average Trading method involves a couple of signals that tell us when to be prepared to enter and exit the market. The most basic Moving Average signal is when the price crosses the Moving Average. When the price breaks the Moving Average upwards, we get a bullish signal.

And on the flip side, when the price breaks the Moving Average downwards, we get a bearish signal.

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We have a period SMA on the chart. The image shows four signals caused by price action and the Moving Average line interaction. In the first case the price breaks the period SMA in a bullish direction. This creates a long signal. The price increases afterwards. The second signal on the chart is bearish. However the signal is a false breakout and the price quickly returns above the SMA. Then the price breaks the period SMA in a bearish direction creating a short signal. The following drop is quite strong and sustained. If you trade with this strategy you should remember that in general, the more the periods included in the Moving Average, the more reliable the signal is.

And many traders who follow a simple moving average system watch the 50 day moving average and the day moving average line very closely. However, when using a higher moving average, the lag of the Moving Average line to Current Price Action will be greater too.